Moody’s, finance minister to take centre stage

Though lots of economic data is coming out this week, it is the mediumterm budget policy statement on Wednesday that will take centre stage, followed by a scheduled review from credit-ratings agency Moody’s Investors Service on Friday.

This year’s medium-term budget policy statement has taken on added significance as economic growth disappointed and the government spent more on parastatals, notably power utility Eskom, while the SA Revenue Service struggled to achieve tax-collection targets thanks to poor growth and a legacy of governance problems.

Finance minister Tito Mboweni will detail the full effect of the extra R59bn financial support for Eskom, announced in July, on the government’s finances, including its borrowing levels. He is expected to give more details on restructuring Eskom debt. A new CEO for the utility is to be named by end-October.

Economists expect that fiscal metrics, watched by ratings agencies and investors to gauge financial sustainability, will have worsened since February.

The government’s deficit is expected to rise to close to 6% of GDP, well above February’s forecast of 4.7%. Government debt to GDP is expected to be upwards of 58%, from February’s forecast of 56.2%. The Treasury is expected to revise down its economic growth forecast for the year from 1.5% to closer to that of the Reserve Bank, which is 0.6%.

“Years of poor management ... and state capture, aggravated by weak economic growth, will have a detrimental impact on SA’s fiscal scenario in the medium term,” said NKC Africa economist Elize Kruger.

The “significant underperformance” of the economy relative to February projections will probably result in a notable revenue shortfall, a growing budget deficit and higher government debt levels this year and beyond, she said.

A clearer picture of the extent of undercollection will emerge. Momentum Investments says the shortfall for fiscal 2019/2020 could come in at about R50bn against February’s forecast. Intellidex puts this at R60bn.

Given the government’s constrained ability to borrow more or raise taxes, it will have to show how it aims to reduce spending in coming years, particularly on the public sector wage bill (35% of spending).

Mboweni has indicated the Treasury could give an updated version of its economic strategy document, published in August, on finding ways to stimulate growth. The budget’s outcome, evidence of structural reform and an Eskom plan, will be closely watched by Moody’s, which is the last ratings agency to hold SA debt at investment grade, with a stable outlook.

The agency indicated in September it is unlikely to downgrade SA in the coming 12 to 18 months. But, given fiscal slippage, Moody’s could change its outlook to negative, said Kruger.

The government publishing a 20-year electricity investment roadmap last Friday plus the promise of an Eskom plan and a new CEO could mean SA avoids a downgrade, said Investec economist Lara Hodes. But Moody’s could downgrade the outlook to negative in 2020.

A day before Mboweni’s announcement, Stats SA will issue the quarterly labour-force survey for the third quarter..

“The labour market remains weak with little signs of meaningful investment unfolding amid subdued confidence levels,” said FNB economics analysts.

“As such, we expect that labour market prospects in [quarter three] lingered at depressed levels with both the unemployment rate and discouraged workseekers remaining untenably high.”